Business Directories

Egypt economy on 'life support'

, August 8, 2012

By Una Galani

Egypt is getting closer to the brink. A trickle of aid has been enough to keep the economy on life support since the uprising 18 months ago, but the ongoing tussle between the country's military and its Islamist president is delaying any form of recovery - let alone reform.

A $1.1 billion fall in foreign reserves in July was a warning signal about the growing financial fragility of the Arab world's most populous nation.

Foreign reserves declined again sharply after a three-month pause. Egypt's foreign reserves fell to $14.4 billion in July from $15.5 billion in June, according to central bank figures.

Egypt has little foreign debt, but the redemption of a eurobond and payment to Paris Club member countries during the month totalled $1.6 billion. A monthly breakdown isn't provided and one-off items may have masked the true extent of the drain.

In recent months, Egypt has revalued its gold holdings, received almost $1.5 billion in loans from Saudi Arabia, and agreed a $1 billion deal with the Islamic Development Bank.

With the limited aid it has secured, and by selling treasury bills to the country's banks at yields of almost 16 percent, Egypt has limped along and even kept shoring up the pound, which weakened by just five percent against the dollar since the revolution.

This has helped the country's military rulers, who retain legislative powers, delay unpopular decisions while the country remains without parliament and constitution, leaving the newly-elected president with an ambiguous role.

No wonder that the economy is getting worse. Egypt's GDP has shrunk for the last two quarters after seasonal adjustments, according to Capital Economics. Government borrowing is crowding out lending to the private sector. Tourism is stagnant. The current account deficit is widening. At best, recovery is delayed. At worst, rampant unemployment will lead to a full-blown social and financial crisis.

Egypt, of course, would need to take action to stimulate growth. In the short term, barring a jumbo loan from the Gulf, it must sign a deal with the International Monetary Fund when the two sides meet in Cairo later this month and then devalue its currency.

Until then, potential investors will remain on the sidelines while the economy keeps sinking.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own) - Reuters